Human Resources Chapter 6 Employersponsored Disability Insurance Life Insurance And Workers Compensation Programs Employersponsored

Chapter 06 – Employer-Sponsored Disability Insurance, Life Insurance, and Workers’ Compensation Programs

Chapter 06 Employer-Sponsored Disability Insurance, Life Insurance, and Workers’

Compensation Programs

I. Learning Objectives (use PP 6.2)

2. Differences between short-term and long-term disabilities

4. Workers’ compensation insurance objectives

5. Types of workers’ compensation claims

II. Disability Insurance

A. Overview (use PP 6.3)

1. Replaces income for employees who become unable to work on a regular basis

because of illness or injury and is more encompassing than workers’ compensation

2. Benefits apply to both work-related and nonwork-related illnesses and injuries

4. Companies that do NOT self-insure or get coverage from state funds may purchase

insurance policies from one or more insurance carriers

5. Two forms of disability insurance (use PP 6.4)

a. Short-term

i. Which covers disabilities that last less than 6 months

6. Short-term and long-term plans may overlap, NOT replace, coverage with the

disability benefits mandated by Social Security

8. Sick leave policies are separate from disability leave policies

a. Sick leave compensates employees when they are absent due to occasional minor

illnesses or injuries

b. Sick leave benefits are paid from the regular payroll

B. Origins of Disability Insurance and Workers’ Compensation Insurance (use PP 6.5)

1. Began in late 1800s because

2. Workers’ compensation programs were created by state government, rather than the

federal government

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3. First workers’ compensation law was passed in 1911

5. Two principles behind workers’ compensation:

6. Prior to 1960s, there were three forms of disability insurance

a. Establishment funds, created by employers to provide minimal cash payments to

7. Initial forms were primitive because they

a. Paid lump sum benefits

b. The amount was generally the same regardless of age or the severity of illness or

injury

C. Coverage and Costs of Disability Programs (use PP 6.6)

1. In 2011,

a. 38% of private sector workers participated in an employer sponsored short-term

disability plan and 32% participated in a long-term disability plan

b. Among full-time workers,

D. Short-Term Disability Insurance Programs (use PP 6.7)

1. Classified as an inability to performs one’s regular job duties, including

a. Recovery from injuries

2. Most plans pay employee

3. Benefits paid for up to 6 months (26 weeks)

5. Example: Employee earns $130,000 ($10,833 monthly), company pays 66.67% with

6. Preexisting condition clause

a. Similar to health insurance plans

Chapter 06 – Employer-Sponsored Disability Insurance, Life Insurance, and Workers’ Compensation Programs

7. Waiting Periods

a. Generally two

i. Preeligibility

ii. Elimination period

8. Exclusion Provisions

a. List the particular health conditions NOT covered by the disability plan

E. Long-Term Disability Insurance (use PP 6.8)

1. Two-Stage Definition

a. Long-term disability

i. Referred to illnesses or accidents that prevented an employee from performing

his own occupation, based on the employee’s education, training, or

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2. Characteristics

a. Maximum benefits usually equal 50% to 70% of monthly pre-tax salary (subject to

a maximum) and the monthly maximum may be as high as $5,000

F. Funding Disability Insurance Programs (use PP 6.9)

1. Pertains to both short-term disability and long-term disability plans

2. Three options

a. Independent insurance companies

3. Partial versus full self-funding, 2 considerations

a. The size of the employee group

i. Larger groups help employers predict the probability of disability occurrences

III. Relationship Between Company-Sponsored Disability Plans and Benefits Laws

A. Four Benefit Laws that Influence the Design and Implementation of Company-

Sponsored Plans (use PP 6.10)

2. American’s With Disability Act of 1990 (ADA)

4. States workers’ compensation and Social Security disability regulations

B. ADEA (use PP 6.11)

1. Older Workers Benefit Protection Act (OWBPA), which is the 1990 amendment to

2. OWBPA applies the equal benefit or equal cost principle

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3. An ADEA safe harbor allows employers to reduce the duration of long-term

4. An employer may choose to lessen the amount of time during which disabled older

C. ADA (use PP 6.12)

1. Prohibits discriminatory employment practices against qualified individuals with

disabilities

2. U.S. Equal Employment Opportunity Commission (EEOC) oversees administration

and enforcement of ADA

3. Employers violate the ADA when they do NOT extend coverage to qualified

individuals with disabilities or when they provide less favorable treatment, like

D. ERISA (use PP 6.13)

1. Regulates the establishment and implementation of company-sponsored benefits

practices

3. Titles I, II, & III apply to non-pension benefits (more in Chapter 4)

4. Title I contains provisions that provide employees protections for benefits rights:

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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

6. Title III addresses the administration and enforcement of ERISA

E. State Workers’ Compensation and Social Security Disability Regulations (use PP 6.14)

1. Employees may receive long-term disability benefits from public disability programs

and company-sponsored programs

2. Companies that self-fund or private insurance companies may include an offset

IV. Life Insurance (use PP 6.15)

A. Overview

2. Most benefit amount equals some multiple of the employee’s salary

4. Most company-sponsored insurance plans also include accidental death and

dismemberment claims

6. Group plans

a. Allow all participants covered by the policy from coverage while employers

assume the burden of financing the plan either partly or entirely

b. Permit a larger set of individuals to participate in a plan at a lower cost per person

B. Origins of Life Insurance

1. Industrialization, government-imposed wage freezes during WW II and IRS favorable

tax codes led to the rise of Social Security

C. Coverage and Costs of Life Insurance in 2011

1. U.S. companies offered life insurance to

2. On average, employers spent $80 annually per employee to provide life insurance

coverage

D. Types of Life Insurance Programs

1. Three kinds

2. Term life

a. The most common type offered by employees

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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

d. In order to continue coverage employee must renew the policy and make premium

payments while below the maximum allowed age of coverage

3. Whole life

a. Pays beneficiaries’ a specified amount upon the death of the employee

b. Policies do NOT expire until payment to beneficiaries

4. Universal life

a. Provides protection to employees’ beneficiaries based on the insurance feature of

term life insurance

E. Group Term Life Insurance

2. Employers offer two plans (use PP 6.16)

3. Contributory plans

4. Noncontributory plans

a. The employer pays the entire premium for coverage within designated limits

F. Costs of Group Term Life Insurance (use PP 6.17)

1. Employers’ costs for the purposes of U.S. Treasury Regulations Section 79 do NOT

refer to the actual annual premium amounts,

a. They are based on regulation established by the U.S. Code in a table titled

b. This expresses the monthly cost for group term life insurance based on gender and

age (in five year brackets) (refer to Exhibit 6.1)

c. The process used to decide if to issue an insurance policy, under what terms, and

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G. Universal Life Insurance (use PP 6.18)

1. Combines features of term life insurance and whole life insurance

3. Insurance company initially breaks down premium into insurance and savings

5. Permits the cash value of investment to grow at a variable rate tied to market

6. Leads to changes in premium, benefits, and payment schedules

H. Accidental Death and Dismemberment Insurance (AD&D) (use PP 6.19)

1. Covers death and dismemberment as a result of accidents

2. Dismemberment refers to

4. Premiums are generally lower than life insurance premiums since incidences of

death by accident are lower than death by natural causes

6. However, with shift to service sector, fewer hazards in the workplace, emphasis on

safety and training, accidental death has become less of a concern

8. AD&D seen as cost prohibitive

10. Employees older than 40 are more likely to die of natural causes and with an

aging workforce AD&D loses relevance

V. State Compulsory Disability Laws (Workers’ Compensation)

A. Overview

1. Workers’ compensation insurance programs are run by states and designed to cover

expenses incurred in employee work-related accidents and injuries

2. Six basic objectives (use PP 6.20)

a. To provide sure, prompt, and reasonable income and medical benefits to work-

accident victims, or income benefits to their dependents, regardless of fault.

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B. Coverage of workers’ compensation programs (use PP 6.22)

2. Participation compulsory in all states except for New Jersey, South Dakota, and Texas

where employers are not required to provide workers’ compensation insurance.

4. Contributory negligence legally refers to

a. Behavior that contributes to one’s own injury or loss and fails to meet the

5. Maritime workers within U.S. borders and federal civilian employees are covered by

their own workers’ compensation programs

7. Federal civilian employees receive workers’ compensation protection under the

Federal Employees’ Compensation Act

8. Workers’ compensation laws cover virtually all employees in the United States,

C. Cost of workers’ compensation insurance (use PP 6.23)

2. The annual amount was substantially higher for workers in goods-producing

3. There is wide variation in the cost of workers’ compensation from state to state

D. Workers’ compensation claims (use PP 6.24)

1. Employees can make three kinds of claims for workers’ compensation benefits

a. Injury claim, usually defined as a claim for a disability that has resulted

from an accident during the course of fulfilling work duties, such as a fall,

an injury from equipment use, or a physical strain from heavy lifting

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i. Pneumoconioses, which are associated with exposure to dusts

ii. Silicosis from exposure to silica

iii. Asbestos

iv. Radiation illness

d. Death claim, asks for compensation for a death that occurs in the course of

E. Types and amounts of workers’ compensation benefits (use PP 6.24)

1. Unlimited medical care

a. Medical benefits usually provided without regard to the amount or time

2. Disability income

a. Compensates individuals whose work-related accidents or illnesses have at

least partially limited their ability to perform the regular duties of their

jobs

b. Benefit amounts depend on the nature of the disability

c. Workers’ compensation programs recognize four types of disabilities:

i. Temporary total

ii. Permanent total

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finger, hand, or eye

ii. Nonscheduled injuries refer to general injuries of the body that make

working difficult or impossible. Examples of nonscheduled injuries

include back and head damage

i. For either temporary or permanent total disabilities, an employee usually

j. Three noteworthy exceptions are in Alaska, Iowa, and Michigan, which

pay 80 percent of spendable earnings

k. Most states limit the duration of benefits for all temporary disabilities,

l. Payments for permanent total disabilities extend for the life of an injured

person

m. Most states calculate actual scheduled benefits as the product of the

specified number of weeks of benefits and the weekly benefit amount

n. States rely on one of three approaches to pay benefits for permanent

partial disabilities of the unscheduled type

i. Impairment approach bases benefit amounts on the physical or

3. Death Benefits

a. Awarded in two forms – burial allowance and survivors’ benefits

i. Burial allowances reflect a fixed amount, varying by state

4. Rehabilitative Services

a. Covers physical and vocational rehabilitation

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F. Employers’ Rights under Workers’ Compensation Programs

1. Participation in workers’ compensation programs and compliance with applicable

2. Four possible exceptions to immunity from legal action

a. An employer’s intentional acts

3. An employer’s intentional acts (use PP 6.25)

a. Most state courts consider intentional actions to harm employees as

reasonable cause for holding an employer liable

b. There are two kinds of lawsuits that allege an employer’s intentional acts

4. Retaliations against workers who filed workers’ compensation claims

a. Employees possess the right to sue employers who retaliate against them

5. Employer noncompliance

a. Employers begin to fulfill their obligations by purchasing insurance from

state funds, private insurance carriers, or through self-insurance

b. Failure to carry workers’ compensation insurance may lead to one or more

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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

i. First, they gain the right to initiate legal action against noncompliant

employers, as just described

ii. Second, most states extend workers’ compensation protection to

employees regardless of an employer’s compliance status

6. Dual capacity (use PP 6.25)

a. Legal doctrine that applies to the relationship between employers and

employees

b. A company may fulfill a role for an employee that is completely different

7. Typical employers’ defense when employees challenge immunity (use PP 6.25)

a. Employer defenses rely on assertions that the causes of injuries or

illnesses were unrelated to work-related activities

i. Preexisting conditions (illnesses or injuries that occurred prior to

participation in an employer’s workers’ compensation program,

G. Financing workers’ compensation programs (use PP 6.26)

2. A third funding option, self-insurance, requires companies to deposit surety

bonds, thus enabling them to pay their own workers’ claims directly

4. In most states, the insurance commissioner sets the maximum allowable workers’

compensation insurance premium rates for private insurance carriers

6. States rely on ratemaking service organizations to set initial rates

7. Ratemaking service organizations collect data on workplace accidents and put

8. Rating manuals specify insurance rates based on classifications of businesses

9. Second-injury funds represent an important funding element of workers’

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11. Employers should be less reluctant to hire a qualified individual with a disability

12. Qualified individuals should have fewer barriers to employment due to the cost

H. Relationship between workers’ compensation and benefits laws (use PP 6.27 & 6.28)

1. Workers’ compensation laws may modify some of the provisions under the

2. Family and Medical Leave Act (FMLA) provides employees with job protection

4. A qualified beneficiary refers to any individual who is a beneficiary under the

group health plan as the

5. These modifications depend on an employer’s definition of “eligible employee”

6. Typically, employees maintain eligibility either until termination of employment

7. Companies may not refuse an employee’s request for FMLA leave to cover

8. Employees are eligible to receive continued health care coverage during and

9. In 1981, the Black Lung Benefits Act eliminated the presumption that any lung

disease was contracted on the job (in coal mines) as non work-related factors such

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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Summary

This chapter presented the fundamental concepts of employer-sponsored disability and life

insurance programs, including legally required workers’ compensation insurance.

Discussion Questions

1. Discuss the basic concept of insurance. How does this concept apply to disabilities and life?

2. Compare the main objectives of state regulation of workers’ compensation programs and

employer-sponsored disability and life insurance plans.

Main Points

• Disability insurance replaces income for employees who become unable to work on a

Chapter 06 – Employer-Sponsored Disability Insurance, Life Insurance, and Workers’ Compensation Programs

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3. What benefits do companies receive when they provide disability and survivor benefits for

nonwork-related occurrences?

Main Points

4. List and describe the types of claims in state workers’ compensation programs. How much

redundancy is there with employer-sponsored private insurance? Explain your answer.

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5. Under what circumstances should employees be ineligible for public or private disability and

life benefits? Discuss the rationale for your answer. Are the expenses associated with providing

public and private programs serving the best interests of society?

Main Points

Cases

Understanding Your Benefits

A Workers’ Compensation Claim

1. Are you eligible for workers’ compensation? Does it matter if the accident was your

fault?

2. What are your rights in this situation? What should you do?

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Student Responses

1. Are you eligible for workers’ compensation? Does it matter if the accident was your

fault?

2. What are your rights in this situation? What should you do?

1. How do disability insurance benefits differ from workers’ compensation?

2. If a company already offers short-term disability insurance, why should they consider

long-term disability insurance?

3. Do you think the long-term disability insurance benefit would be a valuable addition to

Medfirst’s benefit offerings? Should they include the partial disabilities coverage?

Chapter 06 – Employer-Sponsored Disability Insurance, Life Insurance, and Workers’ Compensation Programs

Instructor Notes

Disability insurance provides income protection to individuals that are not able to work due to

Student Reponses

1. How do disability insurance benefits differ from workers’ compensation?

2. If a company already offers short-term disability insurance, why should they consider

long-term disability insurance?

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3. Do you think the long-term disability insurance benefit would be a valuable addition to

Medfirst’s benefit offerings? Should they include the partial disabilities coverage?